Japan's economy hits brakes

TOKYO--Japan's growth rate halved during the July to September period compared with the first six months of the year, as falling demand from emerging markets as well as weaker consumption put the brakes on the economy's expansion.

The slowdown in growth comes as weaker exports, rising energy costs, and stagnating domestic share prices pose new challenges to Prime Minister Shinzo Abe's goal of lifting the economy out of more than a decade of stagnation.

The country's gross domestic product, the broadest measure of goods and services produced in the economy, expanded at an annualized pace of 1.9% in the three-month period ended Sept. 30, the government said Thursday. The outcome beat a 1.7% growth forecast by economists polled by The Wall Street Journal.

The result was a sharp slowdown from the 4.3% expansion in the January-March quarter and the 3.8% rise in April-June period, growth that set the pace for the world's leading economies during the first six months of the year.

But policy makers stress the slowdown is expected to be temporary, noting that the expansion marks the first four straight quarters of growth since 2010.

"We still think the overall economic momentum is upward as domestic demand is firm," Japanese economy minister Akira Amari told reporters after the release of the data.

The Abe administration's pro-growth policies known as "Abenomics," including the Bank of Japan's aggressive monetary-easing program, have helped lower the yen after years of stifling strength and lift once-listless Tokyo shares. That boosted growth in the first half of the year as the world's third-largest economy enjoyed booming exports and vibrant consumer spending.

But those two growth pillars lost much of their momentum in the reporting period, as exports fell an annualized 2.4% from the previous quarter, while personal consumption edged up a meager 0.3%. They gained 12.2% and 2.3% respectively, in the April-June window.

The latest numbers highlight the weakness of the private-sector engine of growth, especially compared with the U.S., which managed faster 2.8% growth in the same quarter, despite headwinds from its ongoing fiscal consolidation drive.

"It's gotten difficult to boost household consumption through stock prices," a senior government economist said. "How to create consumption growth through employment and wage increases will become the key going forward."

Analysts expect personal spending during the remainder of the fiscal year to the end of March to be buoyed by improved employment situations, higher year-end bonuses, and last-minute consumer demand ahead of the country's sales-tax increase to 8% from 5% in April. But some of them are concerned about the economy after that.

"This is a slowdown of Abenomics," said Masamichi Adachi, senior economist at JPMorgan Securities, noting that growth was largely supported by public works spending, the second "arrow" in Mr. Abe's quiver of economic policies. While he said the economy will continue recovering, with consumption rising ahead of the tax rise, he said the question is what happens in subsequent quarters.

"The Japanese economy will be tested after the sales tax hike," he said.

Ahead of the tax increase, Mr. Abe is compiling another package worth Yen5 trillion, to try and cushion the blow to consumption of the higher tax.

Weaker exports could also become a major threat to Mr. Abe's mission to haul the economy out of its 15-year-long deflationary malaise. Exports have been hit by decreased demand for cars from the U.S. while sales in emerging Asian economies have been hurt by financial-market speculation over the Federal Reserve's plans to downsize its asset-buying program.

"Japan cannot rely on exports. We have to pursue domestic demand-led growth," said Finance Minister Taro Aso during a parliamentary session last week. "We didn't expect economic woes in Europe to last for so long, while China's economy has also slowed down to a growth rate of 7% from 8%."

U.S. Treasury Secretary Jacob Lew largely agrees with this view, but with more emphasis on economic reforms.

"To achieve sustained success, Japan needs to strengthen domestic demand growth, avoid simple reliance on exports," he said in an op-ed piece Tuesday. "Structural reforms and a carefully calibrated fiscal adjustment will be key to supporting the ongoing recovery in demand so that Japan can realize lasting growth."

Government-funded public works helped prop up the third-quarter growth. Public-works spending soared an annualized 28.7% from the previous three-month period, mostly as a part of the government's Yen10.3 trillion ($103 billion) stimulus package earlier this year.

Corporate capital expenditure, meanwhile, continued its weak recovery trend, recording a 0.7% increase, while inventories turned around to a buildup from a rundown, contributing to growth for the first time in four quarters.

Investment on housing was also strong amid Japan's ultralow interest rates and rush demand before the sales tax goes up. Housing investment expanded by an annualized 11.3% on quarter.

Thursday's data also showed that the GDP deflator, a measure of inflationary pressures, fell 0.3% on year, compared with a drop of 0.5% in April-June. While it failed to turn positive, the decline was still the smallest in four years.

Kosaku Narioka contributed to this article

Write to Mitsuru Obe at mitsuru.obe@wsj.com and Takashi Mochizuki at takashi.mochizuki@wsj.com

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